The big bankers are in the news again, and they're steamed.
On Wednesday, bank CEOs testifed before the Financial Crisis Inquiry Commission. Meanwhile, the industry is pushing back against plans from the Obama administration to tax large banks as part of an effort to recoup bailout costs.
JPMorgan Chase CEO Jamie Dimon, bristling at criticism of his hardworking bankers, told employees: "I am a little tired of the constant vilification of these people."
Wall Street's big shots have had enough. They've paid back their TARP money — which, some of them say, they didn't need anyway — with interest. They've got the government off their balance sheets, so now the government should stop meddling with them.
But the big American banks aren't nearly so independent as they would have us believe. JPMorgan Chase, Goldman Sachs and their peers are still benefiting hugely from significant post-crisis subsidy programs that boost their profits. I'm talking mostly about the Temporary Liquidity Guarantee Program (TLGP). This was a program started in the wake of the Lehman Bros. collapse to deal with banks that were having a tough time raising short-term capital on decent terms. Under the TLGP, the Federal Deposit Insurance Corp., which is ultimately backed by the taxpayers, would guarantee debt in exchange for fees paid by the banks issuing debt.
The TGLP was ended to new entrants in June 2009 and thus far has gone without a loss. But the fact remains: Private companies were allowed to borrow massive amounts of money — $345 billion at the peak in May 2009 — on the public's credit. At the end of the third quarter, there was still $313 billion outstanding.
Banks and financial institutions have to pay money to get money. When they pay less to borrow, it's easier to make profits, and they tend to borrow more. When they have to pay more to borrow, it's more difficult to make money. As of Nov. 30, General Electric was the largest user, with nearly $88 billion. (Its GE Capital unit has prodigious borrowing needs.)
But GE was followed by the big bailed-out banks: Citigroup ($64.6 billion), Bank of America ($44.5 billion), JPMorgan ($39.7 billion), Morgan Stanley ($25 billion), Goldman Sachs ($21.26 billion) and Wells Fargo ($9.5 billion). With the exception of Citi, all have paid back their TARP money and feel the government should have no say in their practices going forward.
But if these firms are such rugged individualists, why do they persist in borrowing on the public's credit? And why did they do it in the first place? After all, unlike with the TARP, participation in the TLGP program was entirely voluntary.
Many banks opted out of the program, but the Wall Street biggies weren't among them. At any time, the banks could go out into the public markets and raise debt to replace the taxpayer-subsidized borrowings. But they haven't. The reason: It would make them less profitable.
Take Goldman. Goldman was paying a blended rate of 0.767 percent annual interest on $21.3 billion in FDIC-guaranteed debt. For every 100 basis points (i.e., if that debt bore an interest rate of 1.7 percent instead of 0.7 percent), Goldman is saving $213 million in interest costs per year. In the spring of 2009, when much of this debt was issued, the spread — i.e., the difference between the interest rates charged to private-sector corporate borrowers and to the government borrowers — was significant. In April 2009, it stood at 540 basis points. I don't know what to call this other than a huge subsidy.
There are more ongoing subsidies for the big banks. The fact that taxpayers guarantee the debt of Fannie Mae and Freddie Mac preserved the value of mortgage-backed securities owned by these banks. One of the components of the TARP is the HAMP, under which the government writes checks to lenders who made reckless loans so that they can modify them and keep people in their homes. Funds issued under the HAMP are not expected to be paid back. From April through December 2009, more than $35 billion in such funds have been disbursed to lenders, with more to come.
Among the first questions the Financial Crisis Inquiry Commission should have asked each CEO: How much worse would their profits be if taxpayers weren't insuring huge chunks of their debt — and if they had to borrow on their own credit instead of on the public's? And would they care to quantify the amount of the subsidies they're getting?
Daniel Gross is the Moneybox columnist for Slate and the business columnist for Newsweek.